In a market economy, the incentive function of the price mechanism means that
a rise in price due to a shortage will allocate scarce resources to those buyers who are willing and able to pay the most.
higher prices and the prospect of greater profits encourage firms to increase production and attract new entrants into the industry.
price changes act as a source of information to buyers and sellers, indicating where surpluses or shortages exist.
an increase in price causes demand to expand, making the product more accessible to low-income consumers.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.